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  • Chill running through Australia's boardrooms as directors feel the heat
  • By Elizabeth Knight
  • 28/06/2019 Make a Comment
  • Contributed by: Pete_B ( 1 article in 2019 )
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There is a chill running through the ranks of Australia’s biggest boardrooms. Over the past couple of years, in particular, the actions of the companies they govern have been found wanting, reflecting on directors’ competence to adequately carry out checks and balances.

Ten years ago a landmark case against the directors of property giant Centro lifted the standards set for company directors, leaving them with less shelter to hide behind the actions of management. Next week begins a case brought by the Australian Prudential Regulation Authority against IOOF directors that could reset the bar even higher.

Large and small shareholders, alike, have increasingly been questioning judgments made by directors.

Large and small shareholders, alike, have increasingly been questioning judgments made by directors on everything from their company’s response to environmental concerns to how they remunerate their executives or treat their customers.

The era of trust in the corporate establishment and its non-executives governors is rapidly disappearing and questions are emerging around whether today’s crop of directors are fit for purpose.

"The skills they need and the ability to manage complexity has vastly increased over where it has been," says adjunct Professor and UNSW Australian Graduate School of Management fellow, Jeffrey Tobias.

Dr Jeffrey Tobias.

"Directors are now faced with significant challenges. Many of the challenges are around how to drill down into issues in companies when faced with 1000 pieces of (boardroom) paper - many of which are around compliance and regulation," Dr Tobias says.

"How do you really understand what the culture of an organisation is when you are sitting around the boardroom with like-minded people?"

Tim Bednall, the King & Wood Mallesons partner that runs the legal firm's governance practice and who deals with many top 100 companies, argues there is not a lack of skill or talent or diverse experience around most board tables.

But this doesn’t mean that directors are not without challenges.

He believes directors of large companies are significantly more challenged and expectations of them higher as a result of developments over the past 18 months including the Australian Prudential Regulation Association (APRA) review into the Commonwealth Bank, the financial services royal commission and increased activity by the Australian Securities and Investments Commission.

How do you really understand what the culture of an organisation is when you are sitting around the boardroom with like-minded people?

Jeffrey Tobias, AGNSW
The game has changed and the stakes are higher.

Bednall says directors now need to consider things they haven’t really had to think about even two years ago - including executive remuneration systems that address failures in the management of non-financial risk.

These non-financial risks include conduct risk, compliance risk and reputation risk.

Both Bednall and Tobias agree that the expectation of directors to challenge management has also significantly risen.

It is no longer enough for directors to take everything management brings to the board at face value. Some degree of verification is the new order for directors. Upskilling will become essential as will be keeping abreast of community values.

"No question that the workload for non-executive directors in your average S&P/ASX100 has doubled if not tripled over the past five years," Bednall says.

Faced with potentially more onerous legal liabilities, increasing community rancour and having witnessed a raft of corporate crises, non-executive directors are understandably grappling with how to navigate their responsibilities.

The AGSM, under Tobias, has undertaken a study that involved questioning directors from 10 large companies, including AMP, CBA, BHP, Qantas, James Hardie, AWB, Origin, Glencore and Storm Financial. (From this Tobias compiled a list of issues/questions which will form part of a Directors Colloquium to be conducted next month by the AGSM, in conjunction with the Business Council of Australia and King & Wood Mallesons.)

Here is a sample of the big questions that came out of these interviews.

"How do you verify that management is doing the right thing? How do you validate the decisions being made? Many decisions are made every day by management. How can (and should) the board be aware of them all, let alone verify them?

"When faced with a report that has been signed off by a very senior partner in a major law or accounting firm, do you accept it or not? If not, why not? What questions do you ask?

"Beyond self-reporting and responding to requests, how far should a company go in co-operating with a regulator? Is it an error to share with them a report that was commissioned for internal purposes? Has the climate altered with regulators now taking a significantly more litigious approach?

"When the music stops, why are the ones on the board the ‘baddies’, even though issues had been festering for years and were in the process of being fixed? Are the heroes the ones who charge in after the event?"

When the music stops, why are the ones on the board the ‘baddies’, even though issues had been festering for years.

One of the more difficult dilemmas for non-executive directors will be finding the appropriate line between doing their duty and not impeding management.

There is clearly an expectation from regulators that directors should be challenging management.

"I think the regulators have an unrealistic expectation about how a director should discharge their obligations. (There is) an expectation that directors should perform in a way that gets them involved in management," says Bednall.

"That’s not their role. They are not paid to be involved in management. They won’t be effective if they get involved in management and it will undermine the effectiveness of management itself.

"We need to re-delineate the line between non-executive directors and management and come to a common understanding with regulators including ASIC and APRA as to where that line should be drawn."

Source: https://www.smh.com.au/business/companies/chill-running-through-australia-s-boardrooms-as-directors-feel-the-heat-20190627-p521zk.html


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